By Atom Markarian
The Armenian parliament is set to discuss next week a further toughening of the country’s taxation practices that are sought by the government for ensuring a sizable increase in its budgetary receipts planned for next year.
A package of amendments to the existing tax legislation, tied to the government’s draft 2004 budget, is primarily aimed at tackling a massive evasion of profit taxes by many Armenian companies that routinely underreport their revenues. It is also supposed to complicate other forms of fiscal fraud and would raise fixed duties on natural gas and gambling.
“Taking advantage of our liberal tax legislation, companies report losses that are only partly objective,” said Tigran Khachatrian, a deputy minister of finance and economy. “We are convinced that there is an obvious intent to evade taxes.”
The government introduced last year heavy penalties for those companies that falsely claim to operate at a loss in order to avoid paying Armenia’s flat corporate tax set at 20 percent. The measure proved largely ineffectual as more than a thousand large and medium-sized companies, among them lucrative businesses, posted more than 200 billion drams ($354 million) in combined losses in 2002, despite a record-high rate of economic growth. In addition, various companies owe a total of 60 billion drams to the state.
Many of those firms are widely believed to hide their profits through what is called “dual accounting” in Armenia. Under the draft amendments, a company will have to pay a corporate tax equal to 5 percent of its annual business turnover if it claims losses or profits smaller than that amount.
The corporate tax has until now generated a small share of overall government revenues, the 20 percent valued-added tax and import duties being their main source. The proposed changes have been approved by the International Monetary Fund which criticized the government this summer for the continuing “significant shortcomings” in tax collection.
The Armenian lawmakers have also been asked to approve tougher rules for the collection of personal income taxes. Private firms, responsible for their payment, widely evade them by grossly underreporting their employees’ wages. The government wants them to file a detailed income report on every worker to tax authorities starting from next year.
The government is also keen to scrap legal curbs on the inspection of businesses by tax officials. Under the existing legislation, a corporate taxpayer can be inspected on suspicion of fraud only twice a year. Finance Ministry officials say many in the services sector avoid inputting their revenues into mandatory cash registers and must therefore face closer scrutiny.
Another legal amendment motivated by similar concerns would obligate domestic breweries to mark every bottle of beer, the only alcoholic drink not subject to excise duty in Armenia, with special state stamps. Officials argue that the measure would allow the State Taxation Service to keep track of growing beer sales in the country.
So far there has been no public reaction to the legislative package from Armenia’s business associations. Many of their members often complain about alleged harassment from tax inspectors keen to meet their monthly revenue targets.
The government’s tax and customs revenues totaled 220 billion drams in 2002 and are projected to grow to 256 billion drams ($453 million) next year. Officials say the taxation changes will raise an extra 8 billion drams, while the rest of the planned revenue increase is to be generated by further economic expansion.